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Thursday, October 10, 2013

U.S. Debt: Never say never

You know, back before the 2008 crisis began there was a lot of talk about how it would "never" happen. That the subprime housing bubble would never pop. Yet despite all of the optimistic and sure as shit outlooks, it did happen. We're still dealing with the fallout today and that was only a partial collapse. You'd think by now the world would have learned to never say never especially when it comes to the corrupt monstrosity referred to as the economy.

Over the last few years though with the continual bombardment of cliffs and edges and wires and stimulus and bailouts a new confidence has arisen; a confidence that no matter how bad things get there is always one more emergency measure to put in place to stop everything from falling apart.

I came across a post today by a fellow Canadian blogger who states that a default by the U.S. will never happen. I don't normally like commenting on other blogs as I prefer to save my criticism for officials or bad journalism but the argument he lays out for why the U.S. will never default is rooted in exactly the sort of false confidence in emergency measures I've been talking about.

I will reproduce his post here for the purpose of commenting paragraph by paragraph.

There is a lot of nervousness and anxiety out there, particularly in the capital markets over the US government shut down for one, but more so over the prospect that by failing to increase their debt ceiling the United States might default on some of its obligations.

"Might" implies they have a choice in the matter which in the case that the debt ceiling is not raised and barring any desperate emergency measures by the U.S. treasury (we'll get to these in a bit) there is no choice in the matter.

Well, it ain't gonna happen.

This time. But as I said in my post yesterday, what about next time? and the time after that? The results and the measures taken after each "debt crisis" over the last few years have gotten progressively worse, not better.

For arguments sake, if the US were to default the consequences would be nothing short of disastrous, not just for Americans, but for the entire world. US government debt instruments are close to the gold standard when it comes to investments sought for safety during times of uncertainty. If Washington stops paying its bills, the Great Financial Crisis of 2008 will look like a day at Disney Land as capital markets freeze with no hope of help from the government of the world's largest economy.

This paragraph is almost completely correct, though I definitely have to take issue with "US government debt instruments are close to the gold standard when it comes to investments sought for safety during times of uncertainty". This does not hold true when the uncertainty revolves directly around U.S. debt. There is no gold standard anymore, the U.S. debt dollar replaced it, though perhaps what the author meant to say was "gold" as the gold standard doesn't apply to his sentence. In any case the usage of it is somewhat ironic since U.S. debt did replace the gold standard with the USD becoming the defacto world reserve currency. Which brings us to our next portion...

That is why it won't happen.

Bad things won't happen because they would be bad. Well 2008 wasn't supposed to happen either, and that was bad, wasn't it?

Does that mean the fight going on between Tea Party factions and Democrats supported by moderate Republicans is without meaning? Far from it. Tea Party types are adamant about derailing health care reform. In doing so they are providing a big boost to advocates of the status quo. The fact is the US has the most expensive health care system in the world, and while millions of Americans have no coverage (including children) the health care industry is doing just fine at making profits.

What's lost in the muck of the theater battle over 'Obamacare' (which we will get to in a moment) is the reason why the U.S. can simply raise it's debt ceiling to avoid default. The reason why is that the USD is the world's reserve currency this means that the U.S. can print said currency, trade it for real goods (namely oil) with any country in the world, and everything is hunky dory. However, assuming this relationship is permanent and forever is a huge mistake. Countries like China and Russia have already started trading oil in alternative currencies. The BRIC nations are attempting to create a new gold backed currency basket to compete with the U.S. dollar and IMF. Nations like Iraq and Libya found themselves the target of U.S. military strikes and in the case of Iraq an invasion after declaring they would no longer accept USD for oil. The long and short of it is that the U.S. can print all the money it wants but at the end of the day there must be countries willing to accept it for real goods. Food, energy, etc. You can't eat a dollar bill and the U.S. more and more is having to resort to military tactics to enforce usage of their dollar.

Further complicating the problem is the fact that the FED is essentially monetizing the U.S. debt to keep interest rates low at a rate of $85B USD / month. Despite all the talk of "tapering" the FED hasn't yet slowed down on these purchases at all and even worse still they haven't prevented interest rates from rising as they've been intended to do. As Chris Martenson shows in his presentation on the collapse of the exponential function the U.S. has up until now followed with a 99% fit a perfect exponential growth curve which makes the assumption then that the future must always be greater than the past. However, starting in 2008 the amount of debt being issued to maintain growth hasn't been keeping up with this exponential curve. If the FED wasn't monetizing debt the U.S. would be even further behind the growth curve and would likely already be in a recession.

That's bad enough, but it gets worse. China is already slowly divesting from U.S. treasuries and the method in which they are doing it is by buying real assets all around the world. From the Gulf of Mexico to the oilsands in Alberta China is dropping USD 'like a boss' and in the process giving western nations back their U.S. debt while taking real assets away from them. The U.S. is surrounded by acquisitions made by China. This may in the short term relieve the U.S. of some of it's funding problems but in the long term is stripping it of the assets which provide it's tax base in revenue in the first place. We like to think that China finally came around to 'playing capitalism' with us but if you take a good look at what they're doing you'll notice that they are keeping all of their assets, and gold, to themselves. Their acquisitions are geopolitical, strategic, and their game plan is all about the long term.

To add insult to injury the continual revelations about how the U.S. and it's western allies are heavily involved with economic espionage against the BRIC nations only hasten a withdrawal of support for the U.S. dollar.

Why would an industry making billions of dollars want things to change? They don't.

Obamacare is a smokescreen for the people to focus on to facilitate the battle of "left vs right". When everything blows up each side will point at the other and say "he did it!" when in reality they both knowingly did it and use this smokescreen to divert attention and cause squabbling amongst the peasants in typical divide and conquer fashion they will have everyone arguing with each other instead of taking the culprits to task.

When you consider all of the issues I listed above what does Obamacare have to do with anything? If lawmakers "won't allow" a default to occur then why would they "allow" the uncertainty in the first place? Because the "tea party types" don't want healthcare reform? Bullshit, Obamacare isn't even healthcare reform. All it does is mandate that more public money will be going to the very private health insurers who definitely do want things to change. They authored the damn bill! Obamacare isn't a government takeover of healthcare, it's a private insurance takeover of what little public healthcare the U.S. already has.

But whether a deal is reached or not, there is no way US legislators will tank the world economy, although we may get down to the 11th hour as zealots seek to leverage fear in an effort to gain concessions.

I agree that this time, it's going to go down to the 11th hour and a stopgap will be passed then as I stated in my post yesterday however this does not mean the next time the same will hold true. The end result of this time will be worse than the end result of the last time.

Economists at Goldman Sachs Group Inc., IHS Inc. (IHS) and BNP Paribas SA said they expect the Treasury to husband the tax money it collects to make sure it can meet interest payments on the nation’s debt. Other obligations, from salaries of government workers to payments to defense contractors, would face the ax. The result: $175 billion less in government spending during November alone, said Goldman’s Alec Phillips in Washington.

“The cutting would be so huge it would put the U.S. back into recession,” said Jim O’Neill, former chairman of Goldman Sachs Asset Management who is now a Bloomberg View columnist.

So sure, there's options to not default, but I'm not sure I would exactly call them better options. Having all your public money going to private banks, interests, and foreigners to pay interest on debt while services are cut, poverty skyrockets, which all results in a positive feedback loop of less and less revenue, more and more borrowing, more and more interest payments, and more and more debt ceiling debates.

If Obama and the democrats blink, the big winner will be the U.S. health care industry, at least in terms of their profits.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

2 comments:

Thanks for reading my blog post on the US debt crisis, and for providing a some very good points. I do think Obamacare is preferable to the status quo, no denying insurance for pre-existing conditions for one....we'll see how it plays out.

A quick point...I was not writing about NEVER, obviously things can change. The US may very well continue borrowing at Biblical levels and eventually reach a point of no return...or they could get their fiscal house in order at some point and stop running massive deficits. I for one think the US doesn't have as much of a spending problem as a taxation problem...they don't raise enough in taxes....a national sales tax akin to our GST to go a long way to putting them on the road to fiscal balance.